China audit changes shift the current

Changes to the rules governing foreign-owned accounting and audit firms in China will have implications for any Australian companies trading in the country as well as Chinese companies listed on the Australian Securities Exchange.

In May the Chinese government announced a 2017 deadline for foreign audit firms to appoint a Chinese national as lead partner and to ensure that a minimum of 80 per cent of partners hold local qualifications.

“The overhaul comes at a delicate time for an audit industry reeling from a rash of accounting scandals at Chinese companies, particularly those listed in high-profile overseas markets such as the United States.

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“KPMG, Deloitte and Ernst & Young’s joint-venture arrangements in China expire later this year, and PwC’s deal runs out in 2017. It was widely accepted that the Finance Ministry would use this deadline, and licence renewals, to change the rules governing foreigners.

“The big four firms have become the dominant players in China, employing 10,000 people. But their market share has slipped from 85 per cent in 2006 to 70 per cent in 2010."

“It is right to point the finger at the Chinese for rejecting international regulatory co-operation. After all, some three dozen countries already co-operate with the Public Company Accounting Oversight Board [an organisation founded by the US Congress to oversee the audit of publicly listed companies]; more agreements are in the works. But it is wrong to blame China for localising. Given that most other countries already demand that accounting firms be run by local partners, China is merely coming into line with global norms. The Big Four and their clients can only pray it does the same on cross-border co-operation."

The changes affecting accounting and audit firms are part of a wider review of the rules governing foreign investment in China generally.

“Overall, this revision of the catalogue tweaks the previous version. Like earlier versions, it is premised upon the important role of the Chinese government in directing economic development and ensuring that foreign investment furthers government goals. The revisions do nothing to change the investment structure or regime. Rather, the revisions merely reflect policymakers’ decisions as to where foreign investment should be allowed to ensure that foreign investment serves to assist Chinese development as directed in the 12th Five-Year Plan, while ensuring government control over foreign investors and their investments".